a) Policies and strategies established by the Group to deal with risks related to the developer and real-estate sector
BBVA has teams specializing in the management of the Real-Estate Sector risk, given its economic importance and specific technical component. This specialization is not only in the Risk-Acceptance teams, but throughout the handling, commercial, problematic management and legal aspects, and includes the research department (BBVA Research), which helps determine the medium/long-term vision needed to manage this portfolio. Specialization has been increased and the management teams in the areas of recovery and the Real Estate Unit itself have been reinforced.
The portfolio management policies, established to address the risks related to the developer and real-estate sector, aim to accomplish, among others, the following objectives: to avoid concentration in terms of customers, products and regions; to estimate the risk profile for the portfolio; and to anticipate possible worsening of the portfolio.
Specific policies for analysis and admission of new developer risk transactions
In the analysis of new operations, the assessment of the commercial operation in terms of the economic and financial viability of the project has been once of the constant points that have helped ensure the success and transformation of construction land operations for our customers’ developments.
As regards the participation of the Risk Acceptance teams, they have a direct link and participate in the committees of areas such as Recoveries and the Real Estate Unit. This guarantees coordination and exchange of information in all the processes.
The following strategies have been implemented with customers in the developer sector: avoidance of large corporate transactions, which had already reduced their share in the years of greatest market growth; non-participation in the second-home market; commitment to public housing financing; and participation in land operations with a high level of urban development security, giving priority to land open to urban development.
Risk monitoring policies
The base information for analyzing the real estate portfolios is updated monthly. The tools used include the so-called “watch-list”, which is updated monthly with the progress of each client under watch, and the different strategic plans for management of special groups. There are plans that involve an intensification of the review of the portfolio for financing land, while, in the case of ongoing promotions, they are classified for monitoring purposes based on the rate of progress of the projects.
These actions have enabled BBVA to anticipate possible impairment situations, by always keeping an eye on BBVA’s position with each customer (whether or not as first creditor). In this regard, key aspects include management of the risk policy to be followed with each customer, contract review, deadline extension, improved collateral, rate review (repricing) and asset purchase.
Proper management of the relationship with each customer requires knowledge of various aspects such as the identification of the source of payment difficulties, an analysis of the company’s future viability, the updating of the information on the debtor and the guarantors (their current situation and business course, economic-financial information, debt analysis and generation of funds), and the updating of the appraisal of the assets offered as collateral.
BBVA has a classification of debtors in accordance with legislation in force in each country, usually categorizing each one’s level of difficulty for each risk.
Based on the information above, a decision is made whether to use the refinancing tool, whose objective is to adjust the structure of the maturity of the debt to the generation of funds and the customer’s payment capacity.
As for the policies relating to risk refinancing with the developer and real-estate sector, they are the same as the general policies used for all of the Group’s risks. In the developer and real estate sector, they are based on clear solvency and viability criteria for projects, with demanding terms for additional guarantees and legal compliance. The policy on refinancing uses outstanding risk rather than nonperforming assets, with a refinancing tool that standardizes criteria and values up to a total of 19 variables when considering any refinancing operation.
In the case of refinancing, the tools used for enhancing the Bank’s position are: the search for new intervening parties with proven solvency and initial payment to reduce the principal debt or outstanding interest; the improvement of the debt bond in order to facilitate the procedure in the event of default; the provision of new or additional collateral; and making refinancing viable with new conditions (period, rate and repayments), adapted to a credible and sufficiently verified business plan.
Policies applied in the management of real estate assets in Spain
The policy applied for managing these assets depends on the type of real-estate asset, as detailed below.
In the case of completed homes, the final aim is the sale of these homes to private individuals, thus diluting the risk and beginning a new business cycle. Here, the strategy has been to help subrogation (the default rate in this channel of business is notably lower than in any other channel of residential mortgages) and to support our customers’ sales directly, using BBVA’s own channel (BBVA Services and our branches), creating incentives for sale and including sale orders for BBVA. In exceptional case we have even accepted partial haircuts, with the aim of making the sale easier.
In the case of ongoing construction work, our strategy has been to help and promote the completion of the works in order to transfer the investment to completed homes. The whole developer Works in Progress portfolio has been reviewed and classified into different stages with the aim of using different tools to support the strategy. This includes the use of developer accounts-payable financing as a form of payment control, the use of project monitoring supported by the Real Estate Unit itself, and the management of direct suppliers for the works as a complement to the developer’s own management.
With respect to land, the fact that the vast majority of our risk is urban land simplifies our management. Urban management and liquidity control to tackle urban planning costs are also subject to special monitoring.
b) Quantitative information on activities in the real-estate market in Spain
The following quantitative information on real-estate activities in Spain has been prepared using the reporting models required by Bank of Spain Circular 5/2011, of November 30. However, given the legal changes in 2012 (see Note 1.7.1), the Group has revised some criteria used in the preparation of this information to adapt it to the new requirements, though this has not had a significant impact for purposes of comparison.
All the data in this section include the Unnim figures as of 2012; the 2011 figures do not include Unnim.
As of December 31, 2012 and 2011, exposure to the construction sector and real-estate activities in Spain stood at €23,656 million and €28,287 million, respectively. Of that amount, risk from loans to construction and real-estate development activities accounted for €15,358 million and €14,158 million, representing 8.7% and 8.1% of loans and advances to customers of the balance of business in Spain (excluding the government and other government agencies) and 2.4% and 2.4% of the total assets of the Consolidated Group.
Lending for real estate development according to the purpose of the loans as of December 31, 2012 and 2011 is shown below:
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| December 2012 Financing allocated to construction and real estate development and its coverage |
Millions of Euros | ||
|---|---|---|---|
| Gross Amount | Drawn Over the Guarantee Value | Specific coverage | |
| Loans recorded by the Group’s credit institutions (Business in Spain) |
15,358 | 6,164 | 5,642 |
| Of which: Impaired assets | 6,814 | 3,193 | 3,123 |
| Of which: Potential problem assets | 2,092 | 911 | 731 |
| Memorandum item: |
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| Write-offs | 347 |
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| December 2011 Financing allocated to construction and real estate development and its coverage |
Millions of Euros | ||
|---|---|---|---|
| Gross Amount | Drawn Over the Guarantee Value | Specific coverage | |
| Loans recorded by the Group’s credit institutions (Business in Spain) |
14,158 | 4,846 | 1,441 |
| Of which: Impaired assets | 3,743 | 1,725 | 1,123 |
| Of which: Potential problem assets | 2,052 | 911 | 318 |
| Memorandum item: |
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| Write-offs | 182 |
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The increase in the Group’s total financing is partly due to Unnim, which has contributed €2,612 million, of which €1,692 million are potential problem assets and €173 million impaired assets.
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| "Memorandum item: Consolidated Group Data (carrying amount)" |
Millions of Euros | |
|---|---|---|
| December 2012 (*) | December 2011 | |
| Total loans and advances to customers, excluding the Public Sector (Business in Spain) | 176,123 | 174,467 |
| Total consolidated assets (total business) | 637,785 | 597,688 |
| Impairment losses determined collectively (total business) | 3,279 | 3,027 |
As of December 31, 2012, 32.0% of the nonperforming assets in this sector are up-to-date on payments, but were classified as non-performing in accordance with the provisions of Appendix IX of Bank of Spain Circular 4/2004. Furthermore, substandard risk amounted to 13.6% of total developer risk.
The drawn over the guarantee value shown in the tables above corresponds to the difference between the gross amount of each loan and the value of the real rights that, if applicable, were received as security, calculated according to Bank of Spain Circular 3/2010, which complements Appendix IX of Bank of Spain Circular 4/2004. This means that additional regulatory corrective factors ranging from 30% to 50%, based on the type of asset, have been applied to the updated appraisal values.
After applying these corrective factors, the excess value above the guarantee value, which represents the amount to be provisioned in accordance with Bank of Spain Circular 4/2004, amounted to €3,193 million and €911 million for nonperforming assets and substandard assets, respectively, as of December 31, 2012 (€1,725 million and €911 million as of December 31, 2011).
In addition, as of December 31, 2012 and 2011, specific recognized provisions for loans to the construction and real-estate development sector in Spain amounted to €5,642 million and €1,441 million, respectively.
As of December 31, 2012 and 2011, the updated appraisal values, without the application of said corrective factors, rose to €22,793 million and €19,288 million, respectively (an average LTV of 67.4% and 73.4%, respectively) which broadly covers the amount of the debt.
The following is a description of the real estate credit risk based on the types of associated guarantees:
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| Credit: Gross amount (Business in Spain) | Millions of Euros | |
|---|---|---|
| December 2012 (*) | December 2011 | |
| Without secured loan | 1,441 | 1,105 |
| With secured loan | 13,917 | 13,053 |
| Terminated buildings | 8,167 | 6,930 |
| Homes | 7,148 | 6,431 |
| Other | 1,019 | 499 |
| Buildings under construction | 1,716 | 2,448 |
| Homes | 1,663 | 2,374 |
| Other | 53 | 74 |
| Land | 4,034 | 3,675 |
| Urbanized land | 2,449 | 2,404 |
| Rest of land | 1,585 | 1,271 |
| Total | 15,358 | 14,158 |
As of December 31, 2012, 64.3% of loans to developers were guaranteed with buildings (89.1% are homes), and only 26.3% by land, of which 60.7% is urbanized.
The information on the retail mortgage portfolio risk as of December 31, 2012 and 2011 is as follows:
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| Housing-acquisition loans to households (Business in Spain) |
Millions of Euros | |
|---|---|---|
| December 2012 (*) | December 2011 | |
| With secured loan (gross amount) | 87,224 | 79,043 |
| of which: Impaired loans | 3,163 | 2,371 |
| Total | 87,224 | 79,043 |
The loan to value (LTV) ratio (resulting from dividing the pending risk at any particular date by the amount of the latest available appraisal) of the above portfolio is as follows:
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| December 2012 LTV Breakdown of secured loans to households for the purchase of a home (Business in Spain)(*) |
Millions of Euros | |||||
|---|---|---|---|---|---|---|
| Total risk over the amount of the last valuation available (Loan To Value-LTV) | ||||||
| Less than or equal to 40% | Over 40% but less than or equal to 60% | Over 60% but less than or equal to 80% | Over 80% but less than or equal to 100% | Over 100% | Total | |
| Gross amount | 14,942 | 22,967 | 35,722 | 11,704 | 1,889 | 87,224 |
| of which: Impaired loans | 312 | 386 | 1,089 | 1,005 | 371 | 3,163 |
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| December 2011 LTV Breakdown of secured loans to households for the purchase of a home (Business in Spain)(*) |
Millions of Euros | |||||
|---|---|---|---|---|---|---|
| Total risk over the amount of the last valuation available (Loan To Value-LTV) | ||||||
| Less than or equal to 40% | Over 40% but less than or equal to 60% | Over 60% but less than or equal to 80% | Over 80% but less than or equal to 100% | Over 100% | Total | |
| Gross amount | 12,408 | 19,654 | 32,887 | 12,870 | 1,224 | 79,043 |
| of which: Impaired loans | 276 | 218 | 695 | 922 | 260 | 2,371 |
Outstanding home mortgage loans as of December 31, 2012 and 2011 had an average LTV of 51% and 50% respectively.
As of December 31, 2012, the Group also had a balance of €906 million in non-mortgage loans for the purchase of housing (of which €89 million were NPA).
The breakdown of foreclosed, acquired, purchased or exchanged assets from debt from loans relating to business in Spain, as well as the holdings and financing to non-consolidated companies holding such assets is as follows:
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| Information about assets received in payment of debts (Business in Spain) | Millions of Euros | |||||
|---|---|---|---|---|---|---|
| December 2012 (*) | December 2011 | |||||
| Gross Value |
Provisions | Carrying Amount |
Gross Value |
Provisions | Carrying Amount |
|
| Real estate assets from loans to the construction and real estate development sectors in Spain. | 8,894 | 4,893 | 4,001 | 5,101 | 1,740 | 3,361 |
| Terminated buildings | 3,021 | 1,273 | 1,748 | 1,709 | 487 | 1,222 |
| Homes | 2,146 | 877 | 1,269 | 1,227 | 333 | 894 |
| Other | 875 | 396 | 479 | 482 | 154 | 328 |
| Buildings under construction | 908 | 528 | 380 | 360 | 115 | 245 |
| Homes | 881 | 512 | 369 | 357 | 114 | 243 |
| Other | 27 | 16 | 11 | 3 | 1 | 2 |
| Land | 4,965 | 3,092 | 1,873 | 3,032 | 1,138 | 1,894 |
| Urbanized land | 3,247 | 2,048 | 1,199 | 1,561 | 570 | 991 |
| Rest of land | 1,718 | 1,044 | 674 | 1,471 | 568 | 903 |
| Real estate assets from mortgage financing for households for the purchase of a home | 2,512 | 1,020 | 1,492 | 1,509 | 401 | 1,108 |
| Rest of foreclosed real estate assets | 653 | 273 | 380 | 403 | 167 | 236 |
| Equity instruments, investments and financing to non-consolidated companies holding said assets | 702 | 383 | 319 | 701 | 287 | 414 |
| Total | 12,761 | 6,569 | 6,192 | 7,714 | 2,595 | 5,119 |
As of December 31, 2012 and 2011, the gross book value of the Group’s real-estate assets from corporate financing of real-estate construction and development was €8,894 million and €5,101 million, respectively, with an average coverage ratio of 55% and 34.1%, respectively.
The gross book value of real-estate assets from mortgage lending to households for home purchase as of December 31, 2012 and 2011, amounted to €2,512 million and €1,509 million, respectively, with an average coverage ratio of 40.6% and 26.6%, respectively.
As of December 31, 2012 and 2011, the gross book value of the BBVA Group’s total real-estate assets (business in Spain), including other real-estate assets received as debt payment, was €12,059 million and €7,013 million, respectively. The coverage ratio was 51.3% and 32.9%, respectively.